Thursday, May 9, 2013

We're posting up notes from the Ira Sohn Conference 2013 in New York. Next up is a summary of the presentation from Stanley Druckenmiller of Duquesne Family Office (previously of hedge funds Duquesne Capital and Soros Fund). His presentation was entitled "The Commodities Conundrum" but he touched on a myriad of topics outlined below.

US Market & Quantitative Easing

Druckenmiller noted everyone is saying, "love the market long term, looking for a correction." He believes the opposite, loves market short-term, but hates it long term. Strongly disagrees with quantitative easing by Bernanke now. Only agreed with the first QE.

"His bond buying is controlling the most important price in the US economy." Says it will end badly, despite money-printing being beneficial to financial assets currently. When Fed slightly tightens, that will hurt things he says. Bernanke completely ignored strong economic data in January and February, but with slightly soft data later, he printed even more money. Expects a "melt-up" in the short-term, due to Fed's current policy.

On Japan

He feels this could be the beginning of a secular bull market in Japan. Kuroda in Japan is doing QE x3 of the US relative to equity market capitalization. He actually thinks the Japanese QE makes sense, because they've been in deflation, particularly their currency strengthening against everyone else in the world.

He believes when the US economy improves and the Fed tightens, it will overwhelm the growth and cause the market to crash. He does not expect that in Japan, because it has been in a long-term deflation. Expects an 18-month run in Japanese stocks. Could be beginning of a new secular bull market for Japan.

Commodities Conundrum

Why have commodity prices gone down, with this explosion in monetary base around the world? He believes it is due to changes in China, slowing economic growth, and mix shift to economic activity away from commodity consumption. Huge surge of supply going forward.

He is betting that this is the end of the "supercycle" for commodities. China has huge credit growth, "shadow banking" growth, just like the US had right before the 2008 crash. Timing is uncertain, but China is possibly going to have a financial crisis.

"Commodities tend to go down while stocks go up” they hug the cost curve, which goes down over time. This was interrupted by a once in a lifetime burst of growth in China. Chinese consumption has exploded, and as they built their infrastructure, they were literally 50% of all commodity demand. They also used a huge stimulus in 2008, which crowded out productive investments, but most important mining companies ramped up production as if this growth rate would continue forever.

No matter how much Central Banks prints money over the next few years, it won't overwhelm the huge supply gains.

Druckenmiller's Picks

- Own companies that benefit from lower commodity prices, short the opposite.

- Growth over value.

- Avoid Brazil, Canada currencies.

- Short the Australian dollar. There is massive foreign ownership of Australian bonds.

- Long Japan; real estate, banks.

- Long: Google (GOOG), one of his biggest positions. In best 2 areas: search/data, and mobility. "Unlike other massive tech stocks engaged in financial engineering prodded by hedge fund managers." Obviously, a dig at AAPL. "By the way, Google doesn't have any exposure to China." (Technically they do, via Android).

We're posting up notes from the Ira Sohn Conference 2013 in New York. Next up is a summary of the presentation from Stanley Druckenmiller of Duquesne Family Office (previously of hedge funds Duquesne Capital and Soros Fund). His presentation was entitled "The Commodities Conundrum" but he touched on a myriad of topics outlined below.

US Market & Quantitative Easing

Druckenmiller noted everyone is saying, "love the market long term, looking for a correction." He believes the opposite, loves market short-term, but hates it long term. Strongly disagrees with quantitative easing by Bernanke now. Only agreed with the first QE.

"His bond buying is controlling the most important price in the US economy." Says it will end badly, despite money-printing being beneficial to financial assets currently. When Fed slightly tightens, that will hurt things he says. Bernanke completely ignored strong economic data in January and February, but with slightly soft data later, he printed even more money. Expects a "melt-up" in the short-term, due to Fed's current policy.

On Japan

He feels this could be the beginning of a secular bull market in Japan. Kuroda in Japan is doing QE x3 of the US relative to equity market capitalization. He actually thinks the Japanese QE makes sense, because they've been in deflation, particularly their currency strengthening against everyone else in the world.

He believes when the US economy improves and the Fed tightens, it will overwhelm the growth and cause the market to crash. He does not expect that in Japan, because it has been in a long-term deflation. Expects an 18-month run in Japanese stocks. Could be beginning of a new secular bull market for Japan.

Commodities Conundrum

Why have commodity prices gone down, with this explosion in monetary base around the world? He believes it is due to changes in China, slowing economic growth, and mix shift to economic activity away from commodity consumption. Huge surge of supply going forward.

He is betting that this is the end of the "supercycle" for commodities. China has huge credit growth, "shadow banking" growth, just like the US had right before the 2008 crash. Timing is uncertain, but China is possibly going to have a financial crisis.

"Commodities tend to go down while stocks go up” they hug the cost curve, which goes down over time. This was interrupted by a once in a lifetime burst of growth in China. Chinese consumption has exploded, and as they built their infrastructure, they were literally 50% of all commodity demand. They also used a huge stimulus in 2008, which crowded out productive investments, but most important mining companies ramped up production as if this growth rate would continue forever.

No matter how much Central Banks prints money over the next few years, it won't overwhelm the huge supply gains.

Druckenmiller's Picks

- Own companies that benefit from lower commodity prices, short the opposite.

- Growth over value.

- Avoid Brazil, Canada currencies.

- Short the Australian dollar. There is massive foreign ownership of Australian bonds.

- Long Japan; real estate, banks.

- Long: Google (GOOG), one of his biggest positions. In best 2 areas: search/data, and mobility. "Unlike other massive tech stocks engaged in financial engineering prodded by hedge fund managers." Obviously, a dig at AAPL. "By the way, Google doesn't have any exposure to China." (Technically they do, via Android).

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